Valuation is my favorite subject in the world (I’m probably a very boring person) and I read a bunch of Damodaran and those books, however reading some letters from buy-side PM’s or Peter Lynch book, they seem to rely on comparable approach every time, I can see why for two reasons:
Exploit pricing differences in the short-term (that’s when you measure performance)
It’s more robust than DCF (i.e changing 1% of WACC in a DCF model.)
Anyone in the hedge fund industry agrees with that?
I have never worked for a HF, but generally I believe that valuing an asset based on an observed benchmark of comparable assets’ valuations (using multiples, etc.) is probably the most important thing to do and the first step to take.
You can’t form your views on an asset without at least knowing what the market’s views on that asset are / would be.
Probably worth noting there’s nothing wrong with using both approaches and seeing how far they are from eachother.
In a hot market with consolidation comparable transactions could very well be over valued fundamentally even though the transaction valuation says it’s not.
None of the methodologies is conceptually superior and it comes down to the quality of your inputs based on your ability to access the relevant info:
Do you have a bullshit made-up forecast developed by applying some random growth rates to the top line, keeping margins flat and making some handwavng assumptions about future CAPEX and WC needs? If yes, please go back to the latest historical results and management’s guidance for next year, and apply multiples based on relevant market data and your knowledge of the industry.
Have you done an extensive due diligence on the company’s internal budget put together by the FP&A team, and had discussions with the CFO about forecast assumptions and drivers and the CEO about the company’s strategic direction and business development plan? If yes, please don’t package all of that info into a made-up multiple applied to some non-relevant historical metric, but prepare a detailed forward-looking DCF analysis.
If you are somewhere in between the two extremes, then maybe use both approaches, assess the relative strengths of each and be able to reconcile any differences in value indications.
Based on my limited experience, it seems to differ a little by industry. In the sector I work in, it seems to be extremely multiple and comparable driven. But the space isn’t an extreme ‘catalyst’ driven sector either, like pharma or other areas.
Mobius, that’s a great rule-of-thumb.
There’s only one rule of valuation. It’s only worth what someone is willing to pay for it.
What a waste of studying for 3 levels.